The Bharatiya Janata Party-led government’s first full-year Budget was met with much approval across the board. It had something for everyone. In a positive step, the Government of India accepted the recommendations of the 14th Finance Commission for a massive increase in the share of central tax collections to states. This move is in consonance with Prime Minister Narendra Modi’s efforts to enhance cooperative federalism. In his Budget speech, Jaitley said his government has devolved a 42 per cent share of divisible taxes to States. This devolution, he argued, will translate to Rs 5.2 lakh crore for the states in 2015. Such a proposal has also given states more leeway to spend according to their needs, although it has left the Union Finance Minister with lower sums under his disposal. These measures, though, will place greater responsibility on states to ensure that they create the requisite institutional capacity to implement schemes and programmes. Without the requisite institutions, however, all these recommendations will come undone. The current scam unfolding in the Madhya Pradesh Professional Examination Board presents a pathetic picture of how state-level institutions induct their cadre. One can only imagine the level of competency available in state institutions, if someone has to cough up a bribe of Rs 4 lakh for a forest guard’s job. Somewhere along the line, state governments will have to fix their institutions, though questions remain whether they possess the necessary political will.
The Union Budget, like the preceding Rail Budget, presented a realistic roadmap for the Indian economy. With devolution of central funds to the states, the present dispensation has laid greater emphasis on working within the constraints of a reduced fiscal space. The Centre, therefore, spelled out a reasonable fiscal consolidation plan, which experts have argued is a precondition for reviving investor sentiment in India. In its bid to propel the nation on a high-growth trajectory, the central government has delayed its original fiscal consolidation plan by one year. The fiscal deficit for 2015-16 will stand at 3.9 per cent of GDP instead of the expected 3.6 per cent, although the government did commit itself to the three per cent target in the medium term. Given the revised fiscal deficit target, the Centre will have the requisite space to spend Rs 70,000 crore to shore up public investment in infrastructure, especially railways and road transport. The expectations, experts argue, is that public investment will push and generate private investment, which at the moment is somewhat reticent.
One of the most significant takeaways from the Budget, however, was some of the steps taken to improve the ease of doing business in India. Two weeks ago, Finance Minister Jaitley announced an e-Biz portal that integrates 14 regulatory permissions at one source. In addition, Jaitley introduced a new bankruptcy law in the Union Budget to fast-track resolution of stressed assets and eased the procedure through which the government can show the door to errant promoters. Further incentives for the corporate sector included a reduction in the corporate tax rate to 25 per cent from 30 per cent over four years. This reduction, however, will be revenue-neutral because other exemptions, which corporate entities were earlier entitled to, have been removed. The aim, one would suggest, is to ease the process of tax collection and incentivise business entities into paying taxes, although the Centre placed an additional 2 per cent surcharge on annual taxable incomes of over Rs 1 crore. This would replace the wealth tax, which was abolished. Besides all the tax sops for the rich, the middle class also saw the Centre raise the personal income tax exemptions, with the maximum claimable exemptions now Rs 4.4 lakh as opposed to Rs 3.8 lakh earlier. In unwelcome news for the middle class consumer, however, the basic rate of service tax was raised to 14 per cent. This sum, Jaitley argues, will ensure tax collections worth Rs 15,000 crore or more.
Although the Finance Minister increased outlay to the Mahatma Gandhi National Rural Employment Guarantee Act scheme by Rs 5,700 crore, one must not forget that the Budget is just an outlay. The amount of money it plans to spend may or may not match up with expenditure on the ground. In fact, once it assumed office, the government restricted MNREGA to 200 of the most backward districts and reduced the ratio of wages paid to workers and the cost of material used from 60:40 to 51:49. The emphasis, as defenders of the Centre have argued, is to avoid leakages. The problem, however, with expenditure on welfare measures, is more fundamental. According to a Lok Sabha document last year, only 25 per cent of the allocation on health had been spent by the Centre till October 2014. The reason behind such a poor intake of funds was that the central government and its requisite partners in the states do not possess the requisite capacity and structures to utilise them, contrary to earlier reports that the health budget was slashed by 20 per cent. Therefore, the Finance Minister’s decision to provide coverage of up to Rs 2 lakh in case of accidents — for a premium of just Rs 12 a year, will be met with much scepticism, despite the prevalence of bank accounts under the Jan Dhan Yojana. Although this is a welcome move, as a large proportion of Indians remain uninsured, does the Centre have the requisite structures in place to implement it?